Safeway’s shares shelved by investors

Analyst day looms large: Bets against Safeway stock at 16-year high

MattAndrejczak

SAN FRANCISCO (MarketWatch) — While supermarket chain Safeway Inc. is aggressively stuffing its shopping cart with its own stock, investors are leaving the shares on the shelf.

Safeway
SWY, -1.82%
is combating shrinking profits at its U.S. stores as the number of items purchased per shopper continues to fall.

It’s also losing market share to other grocers, club-store retailers and discounters, industry analysts believe. And short positions on Safeway shares, essentially bets that the stock will decline further, stand at 16-year high — 17% of all shares outstanding.

Analysts panned Safeway’s profit, saying earnings were propped up by gains from real estate sales, a lower tax rate, and an active stock-buyback program that’s cut the number of shares outstanding. Investors can’t always count on these kinds of things to save the day in the future.

In light of its recent performance, Safeway on Tuesday could face a skeptical crowd when it issues 2012 financial forecast during its annual analyst meeting. Investors are seeking assurances the supermarket chain can turn things around.

“There is nothing in the fundamental story that suggests to us that Safeway is an attractive long-term investment,” Barclays Capital analyst Meredith Adler said in a Feb. 24 report. She cut her 12-month target price to $23 from $25.

Safeway’s been a frequent buyer of its own stock. From Sept. 11 through Feb. 22, it spent $1.5 billion buying back 72 million shares.

With a gain of 3% including dividends over the past year, Safeway shares have lagged the 14% advance made by the S&P Food & Staples Retailing index. Rival Kroger Co.
KR, -0.35%
is up 9% over the same period.

Safeway, recently trading at $21.57, isn’t on Wall Street’s shopping list: There are six sell recommendations on the stock and 10 hold ratings, while five analysts rate the stock a buy, FactSet Research data show.

Safeway’s “clearly challenged by inflation and execution issues,” said Walter Stackow, senior research analyst for investment firm Manning & Napier, which sold its Safeway shares last summer.

In the fourth quarter, Safeway said items checked out per customer was down 3.5%, bigger than the 2.5% decrease in the quarter ended Sept. 10.

Safeway’s sales could improve as it furthers the rollout of its “just for U” discount program, according to BB&T analyst Andrew Wolf, who rates the stock a buy. Safeway offers special discounts based on a customer’s shopping history; consumer can opt to join the program to qualify for the discounts.

The supermarket chain said it picked up share in three markets where ”just for U” has been implemented.

At Tuesday’s meeting, any Safeway plans to sell more stores will be of interest. It runs 1,768 stores in the U.S. and Canada, including regional banners Vons and Dominick’s.

On Jan. 5, Safeway raised a white flag in the Philadelphia market with a deal to sell 16 Genuardi’s stores to Giant Food Stores, a division of Ahold USA
AHONY
(AH).

CEO Steve Burd hinted last week that similar deals could be in the works. Shrinking a store base that extends from California to Maryland could be a way for Safeway to shore up sales and profit.

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